A lesson in economics 101 needed

As we draw nearer to the next federal election, and the very real possibility of a Bill Shorten-led Labor government, discussions around the ALP’s proposed policy of scrapping dividend imputation refunds to certain retirees are becoming more urgent.

As part of the ongoing narrative on this subject, I attended the House of Representatives Standing Committee on Economics public hearing on this matter held recently in the Sydney northern beaches suburb of Dee Why.

Representatives from both major political parties sit on the committee, with coalition members of parliament scrutinising the viability of the proposal and Labor members prosecuting a case in favour of the change.

During the process it struck me that while opposition treasury spokesman Chris Bowen might have a handle on the merits of the policy, his colleagues on the panel do not. In fact, having heard some of the questions the Labor MPs asked of people making statements on the day, it would appear they need a crash course in the fundamentals of economic theory.

One point in particular Matt Thistlethwaite made is a good example.

The member for Kingsford Smith posed to representatives from both the Financial Services Council and the Association of Superannuation Funds of Australia that the current imputation credit policy has encouraged home-country bias among domestic equity investors.

As a result, the change in franking credit policy would address this situation, pushing all investors, and especially retirees, to perhaps construct more diversified portfolios that would help them mitigate risk.

Now on the surface this might be regarded as a prudent argument, but instead it is deeply flawed and demonstrates an inherent lack of understanding of how market forces work.

No one can after all argue with the goal of wanting to encourage investors to construct a well-diversified portfolio with a stronger allocation to an asset class such as international equities. But this argument only stands up if we’re talking about new fund flows entering the market. If the status quo is maintained elsewhere, this would work.

However, the monies people are referring to with regard to the dividend imputation policy are chiefly those belonging to retirees. And if the objective of this legislative amendment rings true, it will be predominantly affecting those SMSFs with more than $1.6 million in assets – funds in the main where members can no longer make contributions.

This means any portfolio adjustments as a result of Labor’s policy will involve money that is currently invested in the Australian equities market. So if SMSF members react to a situation where they no longer receive franking credit refunds, they will have to sell down existing share positions and reinvest the funds in other asset classes in an attempt to replace or substitute their lost income.

Naturally this would see a significant outflow from the domestic securities market, which would in turn prompt a fall in share prices across the board. Not a great outcome regardless of whether better portfolio diversification is achieved.

Pretty simple stuff really, but if some of our elected officials don’t understand how these market machinations work, it’s a real worry. It certainly raises questions as to Labor MPs’ ability to fully recognise any unintended consequences stemming from this policy shift.

Having witnessed this first-hand, my recommendation would be for Bowen to pull his colleagues in to give them a much-needed course in economics 101.


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